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I was able to get my hair cut last week after nearly four months which provided an interesting micro-view on the UK economy and the challenge for many businesses. Hairdressers have seen pent-up demand but after the initial rush to get a haircut what level will business settle at?
First, the shop’s capacity has been cut from three chairs to two by social distancing. Haircuts are by appointment only, with half-hour slots. Second, while working longer hours, the hairdressers have young families and did not want to work too late. Taking these factors together, although working flat out, they thought they would do well to get back to half of the level of pre-Covid-19 sales.
The price of a haircut had been increased to cover the extra Covid-19 safety measures (hand sanitiser, masks, plastic capes). The price of a haircut may need to increase further if hairdressers are to make a decent living. Could lockdown easing/social distancing be inflationary?
The above factors are similar for many quoted companies across a range of sectors. Production has more than likely been impacted by social distancing and different lockdown measures across different countries. There has been a pick-up in activity in June as lockdown measures have eased but companies are now waiting to see where activity settles after the release of pent-up demand. Key is job security and consumer confidence.
The UK economy is very dependent on the services sector and PM Boris Johnson is desperate to get office workers back into the office. The reason is that city centres and London in particular rely on commuter ‘footfall’ – from public transport to retailers, pubs and convenience food outlets. A worker will not be taking a train journey or buying a coffee on the way into the office or popping out at lunchtime to shop if working remotely from home. Safety concerns, childcare issues, savings on the time and cost of commuting along with greater business confidence in the robustness of remote working systems suggest the PM may find getting workers back into the office is far harder than imposing lockdown in March and stopping them from going in.
What have we been watching?
More global Covid-19 lockdown measures and escalating tension between the US and China countered by positive vaccine news.
Covid-19 uncertainty continued to overshadow markets last week with the continued growth in cases in the US, an increase in deaths and the re-imposition of lockdown measures in some US states particularly California. Meanwhile, Latin America has overtaken the US and Canada to become the second worst-hit region in terms of deaths, with Mexico surpassing Italy. In Asia, Hong Kong has re-introduced even more stringent social distancing rules than in the past. Nearly 400million people saw lockdown measures increase last week. Widespread lockdowns have demonstrated their effectiveness at bringing Covid-19 under control but at an enormous economic cost.
Despite the alarming US Covid-19 data there was some positive news as Gilead Science’s Remdesivir, a potential treatment for the most serious Covid-19 cases, was shown to reduce the fatality rate in patients by 62%. Meanwhile, there could be ‘positive news today’ on a Covid-19 vaccine that Astra-Zeneca is developing with Oxford University, as scientists have discovered a jab that may offer ‘double protection’.
The tit-for-tat between the US and China following the introduction of the new security law for Hong Kong continues. China announced sanctions on numerous top US Republicans after the US imposed sanctions on a number of Chinese officials for alleged human rights abuse against Muslim minorities in Xinjiang province. The US is reported to be considering a sweeping travel ban on Chinese Communist Party officials. Tensions were further escalated as the US also declared that ‘most’ of China’s maritime claims in the South China Sea are illegal. Meanwhile, in the UK, mobile phone providers are being banned from buying new Huawei 5G equipment from the start of 2021 and must remove all the Chinese firm’s equipment from their networks by 2027. UK Foreign Secretary Dominic Raab is to set out further measures in response to China’s new security law for Hong Kong.
The UK economy staged a modest recovery in May as lockdown measures were eased. Following a 20% contraction in April, the economy grew by 1.8% in May although this was well below market expectations of over 5%. With more sectors re-opening in June hopefully growth should steadily keep improving. For example, retail sales returned to growth in June, up by 3.4% year-on-year, the largest increase in over two years. Meanwhile, manufacturing production was down by 23% in May, although in line with expectations and a slight improvement on the record fall seen in April. The number of unemployed was 2.6million in June but because of the government furlough scheme the ONS believes the number of hours worked gives a truer reflection of the effect of Covid-19. This shows that since the start of the pandemic that the number of hours worked a week has fallen by a record 16.7%. Despite this, house prices hit a record high this month with the country seeing a ‘mini-boom’ according to listings site Rightmove.
In Europe, German Chancellor Angela Merkel said it was unclear whether EU leaders will reach agreement on a €750bn Covid-19 stimulus fund amidst resistance from some more frugal member states.
The massive US government stimulus programme to help businesses and households survive the economic impact of Covid-19 saw a surge in the US deficit last month with the funding gap in the first nine months of the fiscal year hitting $2.74trillion. Meanwhile, US industrial production in June was better than expected with manufacturing output up by over 7% helped by car plants re-opening. US Treasury Secretary Steve Mnuchin said that US businesses suffering the most from Covid-19 could receive a second round of financing under a federal emergency relief programme.
Japan’s industrial production slumped in May by 26% as Covid-19 lockdowns impacted global trade.
China’s economy grew by 3.2% in the second quarter which was ahead of expectations and followed a 6.8% Covid-19 driven slump in the first quarter. China’s trade data for June suggested that its key export markets are beginning to re-open while imports increased by 2.6%. However, retail sales were less encouraging at 1.8% below the previous year while fixed asset investment dropped by over 3%.
Brent oil edged back below $43 as OPEC+ agreed to increase oil production from August amid signs that demand is recovering following the Covid-19 lockdown. Key members agreed to start rolling back the existing production cap by about 2million barrels-a-day.
Finally, everyone loves a long-term structural growth opportunity such as electric vehicles but the rise in Elon Musk’s Tesla shares is truly staggering. Tesla’s share price has risen by over 300% so far this year and is now worth more than Toyota which sells many more cars. US analysts are expecting it to report a second quarter loss later this week. However, some commentators think it could surprise with a profit and put it on track to join the S&P 500 index within 6 months which would then prompt buying by US index trackers. Market madness or an electric shock?
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